Jan. 2 (Bloomberg) -- Brazil’s decision to weaken a
proposal for boosting energy efficiency by installing smart
meters is wiping out half of a $10 billion market that lured
foreign manufacturers from Elster Group SE to Echelon Corp.

The nation’s electricity regulator, known as Aneel, this
year ruled that a 2010 plan calling for utilities including CPFL
Energia SA and Centrais Eletricas Brasileiras SA to install the
meters was too costly. Under the revised policy, announced Aug.
8, utilities will install the meters only if a consumer asks for
the change, and companies may use cheaper equipment.

The policy shift means the market for the meters, which can
also help pare power theft, may be less than $5 billion through
2020, down from a previous estimate of about $10 billion,
according to data compiled by Bloomberg New Energy Finance.
Utilities may replace as many as 38 million meters by the end of
the decade.

“We were all expecting a massive market and now there’s an
air of pessimism,” Geraldo Guimaraes Jr., vice president for
Latin America at Essen, Germany-based Elster, said in a
telephone interview from Sao Paulo.

Cheaper Power

Under the plan, utilities will pay for a basic meter that
allows homes to buy cheaper power during low-usage hours and
charge more when demand is at a peak, said Orestes Castaneda,
manager of business and technology at Ampla Energia & Servicos
SA, a generator and distributor in Rio de Janeiro state that’s
owned by Italy’s Enel SpA. If consumers want more advanced
systems that can help lower monthly expenses through solar
panels, for example, they will have to foot the bill, he said in
a telephone interview.

The amended strategy comes as President Dilma Rousseff
seeks to overhaul the industry by prompting utilities to cut
rates in exchange for contract renewals. The plan is aimed at
reducing power costs manufacturers say are the fourth highest in
the world, according to the National Industry Confederation.

“The government’s decision to postpone the installation of
the meters is because it would have certainly boosted companies’
investments needs,” said Marcos Severine, head of utilities
research at Banco Itau SA, adding that utilities probably would
have tried to pass on the costs to consumers. “The
justification here is to spread the impact over more time to
avoid tariff pressure.”

Cutting Costs

The previous power-meter plan would have been incompatible
with Rousseff’s goal to cut power costs by as much as 28 percent
to spur industrial growth, said Mauricio Lobo, a manager at Cia.
Energetica de Pernambuco, the Recife, Brazil-based utility known
as Celpe.

“The cost of an obligatory large-scale deployment of
meters will inevitably impact electricity tariffs,” Brasilia-based Aneel said in a June report.

Celpe doesn’t yet have estimates on how many meters it will
install or how much investment will be required for the program,
Lobo said in a telephone interview.

Mismatched Equation

The economics of the previous proposal, which would have
required as many as 68 million meters be replaced, didn’t add
up, Luiz Jose Hernandes Jr., coordinator of the smart grid group
at Campinas, Brazil-based research agency CPqD, said in a
telephone interview.

“Brazilians use five times less power than in the U.S.,
and smart meters here are twice as expensive,” Hernandes said.
“This equation didn’t match.”

Brazil may still decide to replace all its meters with
smart ones in coming years, said James F. Andrus, vice president
of Echelon’s Americas unit.

“The situation regarding smart meters in Brazil seems to
be still in flux,” he said in an e-mailed response to
questions. “It appears that there is still an effort under way
by the government to replace all of the electromechanical meters
with electronic smart meters over the next 10 years. This sounds
promising and we will have to see if it continues to gain
support.”

Scaled-back efforts would be a blow to foreign makers such
as China’s Shenzhen Kaifa Technology Co. and Switzerland’s
Landis + Gyr AG, as well as local producer Ecil Informatica
Industria & Comercio Ltda.

Local Offices

Elster opened a sales office in Sao Paulo in April 2011 and
has since hired 15 people to serve customers in the market,
Guimaraes said. The company made a “huge investment” altering
its factory in the southern city of Cachoeirinha to produce
meters and their associated communications equipment, he said.

Shenzhen plans to open a sales branch in the second half of
next year, Jinmei Liu, deputy general manager of the company’s
metering system business unit, said in a telephone interview.
The idea is to partner with a local factory to produce meters.

“A lot of vendors are probably scrambling to see how they
will handle this new market,” Walter Lowes, managing director
for the Americas at Trilliant Networks Inc., a Redwood City,
California-based communications technology company, said in a
telephone interview. “It’s caused everyone to realign their
Brazil strategies.”